New FINRA Supervision Rule Investigates Advisors’ Backgrounds

By November 27, 2017FINRA

Today we want to look at a very recently passed rule by FINRA that requires broker-dealers to look into the background of its advisors’.  But while most of the top firms already screen new recruits, the new rules could force out up to 5 percent of advisors with past issues.

The regulator’s board of governors voted to amend the existing FINRA supervision rule, expanding firms’ responsibility to verify the “accuracy and completeness” of the information provided on brokers’ form U4. Under the changes, firms will also need to adopt written procedures that include searching publicly available records such as criminal and bankruptcy records, civil litigations, judgments and liens.

Rick Rummage, founder of career consulting firm The Rummage Group says almost all reputable firms already perform a background checks. But it’s not these firms the new rules are targeting, he adds. “It’s the hundreds of broker dealers that are smaller, some which are shady and some of which are magnets for bad apples who will be affected.”

Rummage estimates the new rules could force 5 percent of all advisors out the industry. “We see this now,” Rummage says. “Five to 10 percent of advisors have some sort of complaint or something on their background—bankruptcy, felony, misdemeanor—and half of the time, we can’t get them hired anyway.” But now those firms that previously did not perform background checks won’t hire them after the new rules take affect.

On one hand, it’s surprising that in 2014 that this type of rule is not already in place, but on the other hand, it doesn’t have anything to do with securities law, Rummage says. “Just because they might have some personal problems doesn’t mean they can’t give good financial advice. If they have a few dings, or something like an assault charge, it’s going to be too much.”

Yet the new rules could have a larger impact on broker/dealers during litigation. When there’s litigation against an advisor, Rummage says now firms can’t “play dumb” saying they didn’t know about issues in the brokers’ past. But he’s unsure about the immediate benefits. “It’s further government intervention intruding upon private enterprise,” Rummage says.

Finra said Thursday it will send the amendments to the supervision rule to the Securities and Exchange Commission for review and approval.

This is just another example of the importance of having the proper written supervisory procedures in place, as it protects the broker-dealer and the advisor.  Contact us at Cobia Compliance today to let us help you have this very important item of compliance for your firm correct.


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